SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

(MARK ONE)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934.

For the quarterly period ended December 31, 2000
----------------------------------

[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934.

For the transition period from to
---------------------- --------------

Commission File #0-14732

ADVANCED MAGNETICS, INC.
(Exact name of registrant as specified in its charter)

Delaware 04-2742593
(State or other jurisdiction (IRS Employer Incorporation or
of organization) Identification No.)

61 Mooney Street
Cambridge, MA 02138
(Address of principal executive offices)

Registrant's telephone number, including area code: (617) 497-2070

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes |X| No
---------- ----------

At February 7, 2001, 6,737,232 shares of registrant's common stock (par value,
$.01) were outstanding.

Page 1 of 16

ADVANCED MAGNETICS, INC.

FORM 10-Q

QUARTER ENDED DECEMBER 31, 2000

PART I. FINANCIAL INFORMATION

Item 1 -- Financial Statements

Page 2 of 16

ADVANCED MAGNETICS, INC.
BALANCE SHEETS
DECEMBER 31, 2000 AND SEPTEMBER 30, 2000
(UNAUDITED)

ASSETS DECEMBER 31, SEPTEMBER 30,
------ ------------ -------------
2000 2000
------------ ------------

Current assets:
Cash and cash equivalents ........................... $ 6,151,455 $ 16,120,738
Marketable securities (Note C) ...................... 18,687,638 14,051,850
Accounts receivable ................................. 776,987 639,740
Inventories ......................................... 86,011 91,456
Prepaid expenses .................................... 283,216 187,481
------------ ------------
Total current assets .............................. 25,985,307 31,091,265

Property, plant and equipment:
Land ................................................ 360,000 360,000
Building ............................................ 4,618,296 4,618,296
Laboratory equipment ................................ 8,014,576 8,013,973
Furniture and fixtures .............................. 783,687 782,525
------------ ------------
13,776,559 13,774,794
Less-accumulated depreciation and amortization ...... (9,720,697) (9,620,094)
------------ ------------
Net property, plant and equipment ................... 4,055,862 4,154,700

Other assets ........................................ 421,626 421,626
------------ ------------
Total assets ...................................... $ 30,462,795 $ 35,667,591
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable .................................... $ 340,162 $ 611,891
Accrued expenses .................................... 644,440 786,832
Income taxes payable ................................ 61,651 61,651
Deferred revenues ................................... 3,945,925 3,923,986
------------ ------------
Total current liabilities ......................... 4,992,178 5,384,360
Deferred revenues ................................... 14,993,749 15,977,599
------------ ------------
Total liabilities ................................. 19,985,927 21,361,959

Commitments and contingencies (Note F)

Stockholders' equity:
Preferred stock, par value $.01 per share, authorized
2,000,000 shares; none issued .................... -- --
Common stock, par value $.01 per share,
authorized 15,000,000 shares; issued and
outstanding 6,746,232 shares at December 31, 2000
and 6,773,932 shares at September 30, 2000 ....... 67,462 67,739
Additional paid-in capital .......................... 44,198,223 44,267,120
Retained earnings (deficit) ......................... (28,652,716) (28,110,546)
Accumulated other comprehensive income .............. (5,136,101) (1,918,681)
------------ ------------
Total stockholders' equity ........................ 10,476,868 14,305,632
------------ ------------

Total liabilities and stockholders' equity .......... $ 30,462,795 $ 35,667,591
============ ============

The accompanying notes are an integral part of the financial statements.

Page 3 of 16

ADVANCED MAGNETICS, INC.
STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED
DECEMBER 31, 2000 AND 1999
(UNAUDITED)

FIRST QUARTER ENDED DECEMBER 31,
--------------------------------
2000 1999*
----------- -----------
- -----------------------------------------------------------------------------------

Revenues:
License fees .................................. $ 1,083,660 $ 183,894
Royalties ..................................... 200,000 163,246
Product sales ................................. 265,044 --
Contract research and development ............. -- 10,995
Interest, dividends and net gains
and losses on sales of securities ........... (886,085) 235,845
----------- -----------
Total revenues ........................... 662,619 593,980

Cost and expenses:
Cost of product sales ......................... 46,415 --
Cost of contract research and development ..... -- 3,195
Research and development expenses ............. 820,812 1,367,062
Selling, general and administrative
expenses .................................... 337,562 471,469
----------- -----------

Total costs and expenses ................. 1,204,789 1,841,726
----------- -----------

Loss before cumulative effect of accounting change (542,170) (1,247,746)
Cumulative effect of accounting change (Note B) .. -- (7,457,717)
----------- -----------
Net income (loss) ................................ $ (542,170) $(8,705,463)
=========== ===========

Basic and diluted loss before cumulative effect
of accounting change ........................ $ (0.08) $ (0.18)
Cumulative effect of accounting change ........... -- (1.11)
----------- -----------
$ (0.08) $ (1.29)
=========== ===========

Weighted average shares outstanding:
Basic ....................................... 6,767,007 6,752,027
Diluted ..................................... 6,767,007 6,752,027

*See Annual Report on Form 10-K for the fiscal year ended September 30, 2000

The accompanying notes are an integral part of the financial statements.

Page 4 of 16

ADVANCED MAGNETICS, INC.
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE QUARTERS ENDED
DECEMBER 31, 2000 AND 1999
(UNAUDITED)

FIRST QUARTER ENDED DECEMBER 31,
--------------------------------
2000 1999*
----------- -----------
- -------------------------------------------------------------------------------------

Net income (loss) ................................. $ (542,170) $(8,705,463)

Other comprehensive income (loss):

Unrealized gains (losses) on securities ...... (4,329,952) 834,151
Reclassification adjustment for (gains) losses
included in net income (loss) ........... 1,112,532 --
----------- -----------
Other comprehensive income (loss) ................. (3,217,420) 834,151
----------- -----------
Comprehensive income (loss) ....................... $(3,759,590) $(7,870,312)
=========== ===========

*See Annual Report on Form 10-K for the fiscal year ended September 30, 2000

The accompanying notes are an integral part of the financial statements.

Page 5 of 16

ADVANCED MAGNETICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED
DECEMBER 31, 2000 AND 1999
(UNAUDITED)

QUARTERS ENDED DECEMBER 31,
---------------------------
2000 1999*
------------ ------------

Cash flows from operating activities:
Cash received from customers ....................... $ 395,968 $ 534,399
Cash paid to suppliers and employees ............... (1,738,373) (1,680,788)
Dividends and interest received .................... 144,213 235,845
Royalties received ................................. 183,355 172,475
------------ ------------

Net cash provided by (used in) operating activities (1,014,837) (738,069)

Cash flows from investing activities:
Proceeds from sales of marketable securities ....... 5,002,279 --
Purchase of marketable securities .................. (13,885,786) (1,744,075)
Capital expenditures ............................... (38,205) (2,624)
Proceeds from sale of property, plant and equipment 36,440 --
------------ ------------

Net cash provided by (used in) investing activities (8,885,272) (1,746,699)

Cash flows from financing activities:
Proceeds from issuances of common stock ............ -- --
Purchase of treasury stock ......................... (69,174) --
------------ ------------

Net cash provided by (used in) financing activities (69,174) --
------------ ------------

Net increase (decrease) in cash and cash equivalents (9,969,283) (2,484,768)

Cash and cash equivalents at beginning of the period 16,120,738 17,052,636
------------ ------------

Cash and cash equivalents at end of the period ..... $ 6,151,455 $ 14,567,868
============ ============

*See Annual Report on Form 10-K for the fiscal year ended September 30, 2000

The accompanying notes are an integral part of the financial statements.

Page 6 of 16

ADVANCED MAGNETICS, INC.
RECONCILIATION OF NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
FOR THE QUARTERS ENDED
DECEMBER 31, 2000 AND 1999
(UNAUDITED)

QUARTERS ENDED DECEMBER 31,
---------------------------
2000 1999*
----------- -----------

Net income (loss) ........................................... $ (542,170) $(8,705,463)
----------- -----------

Adjustments to reconcile net income to net cash provided by
(used in) operating activities:

Non-cash license fee revenue ................................ (1,029,248) (183,894)
Accretion of U.S. Treasury Notes discount ................... (82,234) --
Cumulative effect of accounting change ...................... -- 7,457,717
Decrease (increase) in accounts receivable .................. (137,247) 506,517
(Increase) decrease in inventories .......................... 5,445 --
(Increase) decrease in prepaid expenses and other assets .... (95,735) 45,771
Depreciation and amortization ............................... 100,603 138,420
(Decrease) increase in accounts payable and accrued expenses (414,121) 2,863
Increase in deferred revenues ............................... 67,338 --
Net realized (gains) losses on sales of marketable securities 1,112,532 --
----------- -----------

Total adjustments ........................................... (472,667) 7,967,394
----------- -----------

Net cash provided by (used in) operating activities ......... $(1,014,837) $ (738,069)
=========== ===========

*See Annual Report on Form 10-K for the fiscal year ended September 30, 2000

The accompanying notes are an integral part of the financial statements.

Page 7 of 16

ADVANCED MAGNETICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000

A. SUMMARY OF ACCOUNTING POLICIES

BUSINESS

Founded in November 1981, Advanced Magnetics, Inc., a Delaware
corporation (the "Company"), is a biopharmaceutical company engaged in the
development and manufacture of compounds utilizing the Company's core
proprietary colloidal superparamagnetic particle technology and core
polysaccharide technology for magnetic resonance imaging ("MRI"). The initial
products developed by the Company are diagnostic imaging agents for use in
conjunction with MRI to aid in the diagnosis of cancer and other diseases.

These financial statements are unaudited and in the opinion of
management, all adjustments necessary for a fair presentation of such financial
statements have been recorded. Such adjustments consisted only of normal
recurring items. Certain amounts in the fiscal 2000 financial statements have
been reclassified to conform with the fiscal 2001 presentation.

Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The preparation of financial
statements, in conformity with generally accepted accounting principles,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The year-end balance sheet data were derived from audited
financial statements, but do not include disclosures required by generally
accepted accounting principles. These interim financial statements should be
read in conjunction with the Company's most recent Form 10-K and Annual Report
as of September 30, 2000.

B. CUMULATIVE EFFECT OF ACCOUNTING CHANGE

In fiscal 2000, the Company adopted SEC Staff Accounting Bulletin No.
101 ("SAB 101"). The effect of applying this change in accounting principle was
a cumulative charge of $7,457,717, or $1.11 per share, in the first quarter
ended December 31, 1999. This cumulative change in accounting principle
reflected the reversal of license fees and milestone payments that had been
recognized in prior years. Previously, the Company had recognized license fee
revenue when the fees were non-refundable, a technology transfer occurred, no
explicit commitment or obligation for scientific achievement existed, and the
other portions of the agreement, principally supply and royalty, were priced at
fair value. Under the new accounting method applied retroactively to October 1,
1999, these payments are recorded as deferred revenue to be recognized over the
remaining term of the related agreement. During the quarters ended December 31,
2000 and 1999, the Company recognized $182,450 and $183,894, respectively, in
revenue that was included in the cumulative effect adjustment as of October 1,
1999.

C. MARKETABLE SECURITIES

The cost and market value of the Company's marketable securities
portfolio are as follows:

DECEMBER 31, 2000 SEPTEMBER 30, 2000
----------------- ------------------
COST FAIR VALUE COST FAIR VALUE
---- ---------- ---- ----------

Common stock ...... $15,926,027 $10,777,478 $15,970,531 $14,051,850
U.S. Treasury notes 7,897,712 7,910,160 -- --
----------- ----------- ----------- -----------

Totals ............ $23,823,739 $18,687,638 $15,970,531 $14,051,850
=========== =========== =========== ===========

Page 8 of 16

D. INCOME TAX

There were no income tax provisions for the three-month periods ended
December 31, 2000 and 1999 due to net operating losses in those periods.

E. EARNINGS (LOSS) PER SHARE

The weighted average common and common equivalent shares used in the
computation of basic and diluted earnings per share is presented below.
Aggregate options of 617,650 (weighted average exercise price of $7.55) and
490,506 (weighted average exercise price of $8.90) for the quarters ending
December 31, 2000 and December 31, 1999, respectively, have not been included in
the calculation of weighted average shares, since their effect would be
anti-dilutive, given the net loss in both periods.

DECEMBER 31
-----------
2000 1999
--------- ---------

Weighted average number of shares issued and outstanding 6,767,007 6,752,027
Common stock equivalents ............................... -- --
--------- ---------
As adjusted ............................................ 6,767,007 6,752,027
========= =========

F. LEGAL PROCEEDINGS

The Company and certain of its officers were sued in an action entitled
DAVID D. STARK, M.D. V. ADVANCED MAGNETICS. INC., JEROME GOLDSTEIN, ERNEST V.
GROMAN, AND LEE JOSEPHSON, Civil Action No. 92-12157-WGY, in the United States
District Court for the District of Massachusetts on September 3, 1992. The
plaintiff, a former consultant to the Company, claims that he was incorrectly
omitted as an inventor or joint inventor on certain of the Company's patents and
on pending applications, and seeks injunctive relief and unspecified damages. In
addition, the complaint also alleges state law claims for breach of contract,
breach of good faith and fair dealing, breach of implied contract,
misappropriation of trade secrets, conversion, negligent misrepresentation,
misrepresentation, unjust enrichment and unfair trade practices. The District
Court has stayed this federal action pending resolution of an appeal in the
State Court of summary judgment in the Company's favor as well as resolution of
a jurisdictional issue. As noted below, the Massachusetts Appeals Court has
decided the appeal, but the federal action remains stayed as of this date. While
the outcome of the action cannot be determined, the Company believes the action
is without merit and intends to defend the action vigorously. The Company may
not be able to successfully defend this action and the failure by the Company to
prevail for any reason could have an adverse effect on it's future business,
financial condition and results of operations.

The Company and certain of its officers were sued in DAVID D. STARK,
M.D. V. ADVANCED MAGNETICS, INC., JEROME GOLDSTEIN, ERNEST V. GROMAN AND LEE
JOSEPHSON, Civil Action No. 93-02846-C, in the Superior Court Department of the
Massachusetts Trial Court for Middlesex County. This case involves claims of
breach of contract, breach of good faith and fair dealing, breach of implied
contract, unjust enrichment and unfair trade practices that were originally
dismissed by, but later remanded to, the Federal Court in the above-mentioned
action, as well as a new count alleging tortious interference with contractual
or advantageous relations. The Superior Court granted partial summary judgment
in the Company's favor and dismissed the unfair trade practices and tort counts.
The plaintiff's contract claims have been dismissed with prejudice and final
judgment was entered against the plaintiff. The plaintiff filed an appeal in
DAVID D. STARK, M.D. V. ADVANCED MAGNETICS, INC., JEROME GOLDSTEIN, ERNEST V.
GROMAN AND LEE JOSEPHSON, Appeal No. 98-P-1749 in the Massachusetts Appeals
Court, on January 25, 1999. On October 13, 2000, the Massachusetts Appeals Court
reversed the grant of partial summary judgment in the Company's favor and
ordered that the unfair trade practice and tort claims be reinstated. The
Superior Court has redocketed the claims as directed by the Appeals Court, and
it is anticipated that the litigation in state court will now move forward.
While the outcome of the action cannot be determined, the Company believes the
action is without merit and intends to defend the action vigorously. The Company
may not be able to successfully defend this action and the failure by the
Company to prevail for any reason could have an adverse effect on its future
business, financial condition and results of operations.

Page 9 of 16

The Company filed suit on October 7, 1997 against Sanofi
Pharmaceuticals, Inc. (formerly known as Sanofi Winthrop, Inc.) and Sanofi SA
(collectively, "Defendants") in the Superior Court of the Commonwealth of
Massachusetts. The action is entitled ADVANCED MAGNETICS, INC. V. SANOFI
PHARMACEUTICALS, INC. AND SANOFI SA, Civil Action No. 97-5222B. The Company
claims that the Defendants tortiously interfered with a license, supply and
marketing agreement (the "Agreement"), and seeks unspecified monetary
damages. In addition, the Company seeks a declaration that the Defendants do
not have any rights under the Agreement and that the Company has not breached
the Agreement. Sanofi Pharmaceuticals, Inc., filed counterclaims against the
Company on February 4, 1998 seeking compensatory damages of $11,500,000 and
multiple damages as a result of the Company's alleged breach of the
Agreement. On November 13, 1998 the Company filed an amended complaint adding
claims for unfair competition and breach of contract against the Defendants.
On November 23, 1998, the Defendants answered the Company's amended
complaint, and Sanofi Pharmaceuticals, Inc. served a new set of counterclaims
seeking compensatory damages of $15,000,000 and multiple damages as a result
of the Company's alleged conduct. On June 15, 1999, the court granted partial
summary judgment in favor of the Company and against the Defendants, declared
that the Company did not breach the Agreement, was not unjustly enriched, and
did not violate Mass. Gen. Laws ch. 93A, and dismissed Sanofi
Pharmaceuticals, Inc.'s counterclaims for breach of contract, unjust
enrichment, conversion, account annexed and violation of Mass. Gen. Laws ch.
93A. On October 29, 1999, the Company served a second motion for partial
summary judgement which, among other things, requests judgement in its favor
on Sanofi Pharmaceuticals, Inc.'s remaining counterclaims against the Company
and for judgement in its favor on the Company's breach of contract claim
against the Defendants. Also on October 29, 1999, the Defendants served a
motion for partial summary judgement which, among other things, requests
judgement in its favor on the Company's remaining claims. On October 4, 2000,
the Court granted the Company's motion and entered judgment on all remaining
claims brought by Sanofi Pharmaceuticals, Inc. In addition, the Court granted
in part, and denied in part, Defendants' motion for summary judgment. Only
the Company's breach of contract claim against Sanofi SA remains in the case.
On December 26, 2000, the Court denied Sanofi SA and Sanofi Pharmaceuticals,
Inc.'s Motion for Entry of Separate and Final Judgment, seeking to have the
Court certify final judgment on all issues decided on summary judgment,
except for the Company's breach of contract claim against Sanofi SA. On
December 5, 2000, the Court had set a trial date for March 19, 2001 on the
Company's remaining claim. While the final outcome of this litigation cannot
be determined, the Company intends to pursue its remaining claim. In the
event that the judgments in the Company's favor are reversed on appeal, the
Company intends to defend those claims vigorously. However, in such an event,
the Company may not be able to successfully defend those claims and the
failure of the Company to prevail for any reason could impair the Company's
financial resources and disrupt the Company's future operating plans.

G. BUSINESS SEGMENTS

For all periods presented in this Form 10-Q, the Company no longer has
business segments as defined in FASB Statement No. 131 ("SFAS 131"),
"Disclosures about segments of an Enterprise and Related Information".

H. DERIVATIVE FINANCIAL INSTRUMENTS

Beginning in the first quarter ended December 31, 2000, the Company has
adopted the provisions of FASB Statement No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities". The statement establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability, measured at its
fair value. SFAS 133 also requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. The Company has included the fair value of derivative instruments,
principally a written call option on an equity security, in marketable
securities on the balance sheets. The change in the fair value of the open
derivatives at December 31, 2000 has been recorded in interest, dividends and
net gains and losses on sales of securities on the statement of operations. The
written call options held at December 31, 2000 are intended to assist the
Company in taking advantage of opportunities in the domestic equity markets.

Page 10 of 16

There was no derivative trading activity during the quarter ended December 31,
1999, nor were any derivative instruments held at the end of the quarter ended
December 31, 1999.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS. ANY STATEMENTS
CONTAINED HEREIN THAT DO NOT DESCRIBE HISTORICAL FACTS ARE FORWARD-LOOKING
STATEMENTS. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE BASED ON CURRENT
EXPECTATIONS, BUT ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES. THE
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM CURRENT
EXPECTATIONS INCLUDE THE FOLLOWING: THE ABILITY TO SATISFY THE CONDITIONS
SPECIFIED FOR FINAL APPROVAL OF COMBIDEX(R) FOR IMAGING LYMPH NODES AND TO
RESOLVE THE FINAL LABELING FOR COMBIDEX WITH THE FDA, THE ABILITY TO
SUCCESSFULLY MARKET FERIDEX I.V.(R), GASTROMARK(R) AND ANY FUTURE PRODUCTS THAT
RECEIVE FDA APPROVAL, THE COMPANY'S DEPENDENCE ON ITS CORPORATE PARTNERS, DELAYS
IN ARRANGEMENTS WITH CLINICAL INVESTIGATIONS, UNCERTAINTIES RELATING TO RESULTS
OF THE CLINICAL TRIALS OF THE COMPANY'S PRODUCT CANDIDATES, ACHIEVING PROJECTED
EXPENSE REDUCTIONS, THE NEED FOR ADDITIONAL COST REDUCTION MEASURES, THE
COMPANY'S ABILITY TO OBTAIN FUTURE FINANCING, UNCERTAINTIES RELATING TO PATENTS
AND PROPRIETARY RIGHTS, THE ABILITY OF THE COMPANY TO COMPETE SUCCESSFULLY IN
THE FUTURE AND THE RISKS IDENTIFIED IN THE COMPANY'S SECURITIES AND EXCHANGE
COMMISSION FILINGS, INCLUDING BUT NOT LIMITED TO ITS FORM 10-K FOR THE YEAR
ENDED SEPTEMBER 30, 2000. THE COMPANY CAUTIONS READERS NOT TO PLACE UNDUE
RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE
THEY ARE MADE. THE COMPANY DISCLAIMS ANY OBLIGATION TO PUBLICLY UPDATE OR REVISE
ANY SUCH STATEMENTS TO REFLECT ANY CHANGE IN COMPANY EXPECTATIONS OR IN EVENTS,
CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENTS MAY BE BASED, OR THAT
MAY AFFECT THE LIKELIHOOD THAT ACTUAL RESULTS WILL DIFFER FROM THOSE SET FORTH
IN THE FORWARD-LOOKING STATEMENTS.

OVERVIEW

Since its inception in November 1981, Advanced Magnetics, Inc.
("Advanced Magnetics" or the "Company") has focused its efforts on developing
applications of its core magnetic particle technology. This focus has led to the
development of magnetic resonance imaging ("MRI") contrast agents. The Company
has funded its operations with cash from license fees from corporate partners,
royalties, sales of its products, fees from contract research performed for
third parties, the proceeds of financings and income earned on invested cash.
The Company's success in the market for diagnostic products will depend, in
part, on the Company's ability to successfully develop, test, produce and market
its products; obtain necessary governmental approvals in a timely manner;
attract and maintain key employees; and successfully respond to technological
changes in its marketplace.

The Company's operating results may continue to vary significantly from
quarter to quarter, or from year to year, depending on a number of factors,
including: (i) the timing of payments from corporate partners and research
grants; (ii) the introduction of new products; (iii) the timing and size of
orders from customers; (iv) the general level of acceptance of the Company's
products; and (v) increases or decreases in, and timing of, research and
development, clinical trials and other expenses. A substantial portion of the
Company's expenses consists of research and development costs. The Company's
current planned expense levels are based in part upon expectations as to future
revenue. Consequently, profits and losses may vary significantly from quarter to
quarter or year to year based on the timing of revenue. Revenue or profits in
any period will not necessarily be indicative of results in subsequent periods
and there can be no assurance that the Company will be profitable or that
revenue growth will be achieved in the future.

Page 11 of 16

In December 1999, the Company submitted a New Drug Application ("NDA")
with the U.S. Food and Drug Administration ("FDA") for Combidex(R) Magnetic
Resonance Imaging ("MRI") contrast agent. The NDA covers two indications. The
principle indication is for the diagnosis of lymph node disease to assist in
directing biopsy and surgery and aid in the staging of metastatic lymph node
involvement for a variety of cancers, including breast and prostate cancer. The
second indication is for the detection, diagnosis and characterization of benign
versus malignant lesions of the liver and spleen. In June 2000, the Company
received an "Approvable letter" from the FDA regarding Combidex. This letter
indicated that the FDA considered Combidex approvable for its principal
indication, but not approvable at that time for its secondary indication. In
addition, the letter stipulated that approval was contingent upon the Company's
satisfactory completion of additional conditions.

A substantial portion of the Company's expenses consists of research
and development expenses. In an effort to reduce expenditures and improve
efficiency, the Company closed its Princeton, New Jersey office and reduced the
number of employees engaged in clinical development activities. All of the
Company's operating activities have been consolidated into the Cambridge office
in order to improve managerial oversight and inter-departmental coordination and
cooperation. The Company may rely to a greater degree on contract research and
development providers in the future and expects that research and development
expenses will continue to be a significant portion of the Company's total
expenses.

RESULTS OF OPERATIONS FOR THE QUARTER ENDED DECEMBER 31, 2000 AS COMPARED TO THE
QUARTER ENDED DECEMBER 31, 1999

REVENUES

Total revenues for the first fiscal quarter ended December 31, 2000
were $662,619 compared to $593,980 for the first fiscal quarter ended December
31, 1999. The increase in revenues in the first fiscal quarter ended December
31, 2000, compared to the first fiscal quarter ended December 31, 1999, was
primarily due to increases in license fees, product sales and royalties, offset
by losses on sales of securities and reduced contract research and development
revenues.

License fee revenue increased to $1,083,660 in the first fiscal quarter
ended December 31, 2000 from $183,984 in the first fiscal quarter ended December
31, 1999. The increase is primarily related to the recognition in the period of
approximately $853,000 in license fee revenue from a license and marketing
arrangement signed with Cytogen Corp. which had been deferred. Royalties for the
fiscal quarter ended December 31, 2000 were $200,000 as compared to $163,246 for
the fiscal quarter ended December 31, 1999. The increase in royalty revenue
reflects increased sales of GASTROMARK(R) in Europe.

Product sales in the first fiscal quarter ended December 31, 2000
were $265,044, consisting of sales of contrast agents, compared to no product
sales in the first fiscal quarter ended December 31, 1999. This increase is
due to the uneven demand for contrast agents by the Company's marketing
partners.

There was no research and development services revenue in the first
fiscal quarter ended December 31, 2000, compared with $10,995 in the first
fiscal quarter ended December 31, 1999. Contract research and development
services revenues are reimbursements of expenditures for clinical trials. The
decrease reflects the completion of certain clinical trials.

Page 12 of 16

Interest and dividends resulted in revenues of $226,447 in the fiscal
quarter ended December 31, 2000 compared to $235,845 for the fiscal quarter
ended December 31, 1999. There were losses on the sale of securities of
$1,112,532 in the first fiscal quarter ended December 31, 2000 compared with no
gain or loss on the sale of securities in the first fiscal quarter ended
December 31, 1999. The increase in losses on sales of marketable securities is
mainly due to the Company's sale of approximately 480,500 of 1,500,000 shares of
Cytogen Corp. common stock received as a license fee under a license and
marketing agreement signed in fiscal 2000. In addition, pursuant to the
Company's adoption of SFAS 133 in the quarter ended December 31, 2000, the
Company recognized approximately $89,600 in net gains associated with trading
derivative instruments, principally call options, during the quarter ended
December 31, 2000. There was no derivative activity as of or during the quarter
ended December 31, 1999. Interest, dividends and net losses on sales of
securities consisted of the following:

FIRST QUARTER ENDED DECEMBER 31,
--------------------------------
2000 1999
----------- --------

Interest income $ 217,047 $212,220
Dividend income 9,400 23,625
Net losses on sales of securities (1,112,532) --
----------- --------
Total $ (886,085) $235,845
----------- --------

COSTS AND EXPENSES

The cost of product sales for the quarter ended December 31, 2000 was
17% of product sales. Due to the absence of product sales, the Company incurred
no costs for products sold in the first fiscal quarter ended December 31, 1999.
A cost of $3,195 was incurred on contract research and development for the first
fiscal quarter ended December 31, 1999, while no costs were incurred in the
quarter ended December 31, 2000 because there was no such revenue.

Research and development expenses decreased to $820,812 from $1,367,062
for the first fiscal quarter ended December 31, 2000 as compared to the same
period in the prior fiscal year. This decrease arises from reduced activity on
clinical trials associated with Combidex(R). Selling, general and administrative
expenses were $337,562 for first fiscal quarter ended December 31, 2000 compared
to $471,469 for the first fiscal quarter ended December 31, 1999. The reduced
levels of expenditures, for both research and development and selling, general
and administrative costs, are a result of the closing of the Company's
Princeton, New Jersey office.

INCOME TAXES

There were no income tax provisions for the fiscal quarters ended
December 31, 2000 and December 31, 1999 due to operating losses for both
periods.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

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EARNINGS

For the reasons stated above, there was a net loss of $(542,170) or
$(0.08) per share for the quarter ended December 31, 2000 compared to a net loss
from operations of $(1,247,746) or $(0.18) per share and a total loss of
$(8,705,463) or $(1.29) for the quarter ended December 31, 1999.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2000, the Company's cash and cash equivalents totaled
$6,151,455 compared to $16,120,738 at September 30, 2000. In addition, the
Company had marketable securities of $18,687,638 at December 31, 2000 compared
to $14,051,850 on September 30, 2000. The decrease in cash and cash equivalents,
and the corresponding increase in marketable securities, primarily represents
the deployment of excess cash into marketable securities. Net cash used in
operating activities was $1,014,837 in the three-month period ended December 31,
2000 compared to net cash used in operating activities of $738,069 in the
three-month period ended December 31, 1999. The increase of cash used in
operating activities is attributable to a decrease in cash received from
customers of approximately $138,000 and a decrease in dividends and interest
received on securities of approximately $92,000. Cash used in investing
activities was $8,885,272 for the three-month period ended December 31, 2000
compared to $1,746,699 used in investing activities in the three-month period
ended December 31, 1999. Cash used in investing activities in the three-month
period ended December 31, 2000 included the purchase of marketable securities of
$13,885,786, offset by the sale of $5,002,279 in marketable securities. There
was no cash provided by financing activities during the three-month period ended
December 31, 2000, but $69,174 in cash was used to purchase shares of the
Company's common stock. No cash was used in or provided by financing activities
in the three-month period ended December 31, 1999. In November 2000, the Board
of Directors authorized the purchase of up to 1,000,000 shares of the Company's
common stock on the open market at prevailing market prices.

Capital expenditures in the three-month period ended December 31, 2000
were $38,205, offset by sales of capital equipment of $36,440, for a net
expenditure of $1,765. This compares with $2,624 spent in the three-month period
ended December 31, 1999. The capital expenditures in both quarters reflected
upgrades to existing property, plant and equipment. Future expenditures are
expected to continue at the reduced levels.

Management believes that funds for future needs can be generated from
existing cash balances, cash generated from investing activities and cash
generated from operations. In addition, the Company will consider from time to
time various financing alternatives and may seek to raise additional capital
through equity or debt financing or to enter into corporate partnering
arrangements. However, such funding may not be available on terms acceptable to
the Company, if at all.

DERIVATIVE FINANCIAL INSTRUMENTS

Page 14 of 16

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change to the information concerning the
Company's market risk sensitive instruments as set forth in the Company's 10-K
for the period ended September 30, 2000.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There have been no material changes to the information concerning the
Company's legal proceedings as set forth in the Company's Form 10-K for the
period ended September 30, 2000.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibit 27.1 Financial Data Schedule (EDGAR filing only)

The Company filed a current report on Form 8-K on November 17, 2000
reporting the announcement of a stock repurchase program (Item 5: Other Event).

Page 15 of 16

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

ADVANCED MAGNETICS, INC.

Date February 13, 2001 By /s/ Jerome Goldstein
---------------------------- -------------------------------------
Jerome Goldstein, Chief Executive
Officer, Treasurer and Chairman of
the Board of Directors

Date February 13, 2001 By /s/ James A. Matheson
---------------------------- -------------------------------------
James A. Matheson, Vice President
and Principal Accounting Officer

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